[Editorial] Financial ‘big bang’

When the Capital Market Consolidation Act went into effect in February 2009, the government expected a “big bang” in the domestic financial industry. As the new law lowered barriers separating financial services, policymakers anticipated financial companies would actively pursue mergers and acquisitions among themselves to grow into large, multifunctional investment banks.

The much expected big bang never happened. For one thing, the law did not go far enough in tearing down regulatory barriers. For another, it couldn’t come at a worse time ― at the very height of a global financial crisis triggered by the collapse of Lehman Brothers. In the face of a financial tsunami, local firms scrambled for survival.

Now, the financial industry has weathered the global storm. The stock index has surpassed pre-crisis levels, helping securities companies improve their financial position. Banks have significantly raised their capital adequacy ratios in compliance with the new international banking regulation.

The overall soundness of the financial industry has apparently encouraged Kim Seok-dong, the chairman of the Financial Services Commission, to renew his efforts to foster homegrown investment banks. On Sunday, Kim said he would overhaul the capital market law, which was written under his supervision, to ensure that “a revolutionary big bang” takes place in the financial industry, leading to the emergence of powerful investment banks.

Indisputably, Korea needs strong investment banks that can compete in the global arena. These banks will not only spearhead the development and globalization of the Korean financial industry but can help Korean companies win large-scale infrastructure projects in foreign countries.

These days, developing countries that promote multibillion-dollar projects such as nuclear power plants require bidders to finance them, as they are unable to shoulder the heavy capital costs involved. In such a case, the ability to secure project financing on competitive terms is a prerequisite for winning the contract.

But recently Korean companies have lost their bids for a couple of huge overseas infrastructure projects due largely to the absence of Korean investment banks that can offer them competitive finance. It is a shame that the Korean government has been unable to provide a solution to such a problem.

Kim suggested a two-track approach to nurturing investment banks. One is to create a super-large investment bank in the public sector, while the other is to induce private financial companies to merge into large, global players. It is a balanced approach, although whether Kim can achieve it remains to be seen.

The top regulator said he would promote the restructuring of the four state-run financial institutions ― the Export-Import Bank of Korea, Korea Development Bank, Korea Finance Corp. and Korea Trade Insurance Corp. ― to launch a public-sector investment bank. One problem with this scheme is that it clashes with the government’s plan to privatize Korea Development Bank. The government has already separated the bank’s policy-based finance function by establishing Korea Finance Corp.

While Kim claimed that President Lee Myung-bak and relevant ministers expressed support for his plan during a recent policy debate, it is still unclear whether the government would scrap the privatization plan in favor of his scheme.

Nurturing private investment banks is a more difficult ― and important ― task for policymakers. Kim needs to remember that the government can expedite the emergence of powerful private investment banks by speeding up the privatization of nationalized financial institutions.

Kim also needs to start efforts to cultivate a large number of experts in each area of investment banking, because a globally competitive investment bank cannot be created without high-caliber staff.